Learning to read charts and apply the right ratios to make accurate decisions quickly is a vital skill for those looking to
trade for more than a recreational activity. Even with an easy to use trading platform like the one offered by
NinjaTrader, you must be able to understand some basic mathematical principles and ratios to make the right
decisions.
Fibonacci and Trading
The Fibonacci summation series is one of these, and may, in fact, be the most important. This pattern, which is found
over and over again in nature, actually can be applied to the trading platform as well.
Fibonacci discovered a summation series where, starting with 1 and 1 and adding the sum to the previous number,
you can arrive at a nearly constant ratio. His series, which is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233 and so forth,
is seen throughout the natural world in the design patterns of plants and animals. Using this summation series, you
can arrive at an important ratio. If you divide one number by the previous one, such as 55/34, you would get an
answer that is close to the irrational number of 1.61803398875. This, which when rounded to 1.618, is known as phi,
and is also called the “Golden Mean.” Used in architecture regularly, this is considered by some to be the perfect
ratio.
Now, the Golden Mean is quite fascinating, and you could spend hours studying it and its many implications, but how
does it apply to trading? This Fibonacci ratio can be found in many different tools used in trading. Understanding and
using a variety of these tools will help you succeed.
Retracements
Retracements are movements in the opposite direction of the trend in the time frame you are analyzing. For example,
if the market is moving in an upwards direction, then reaches a peak, pivots and begins to fall back towards where it
began increasing, you are watching a retracement.
38,2%
61.8%
Of all of the Fibonacci tools traders can use, this one holds the most weight. The ratios involved in this analysis are
38.2%, 50%, 61.8% and 78.6%, with 50% and 61.8% being the medium time frame and entry time frame traders
most commonly use. In a higher time frame chart, traders may turn on a 38.2% when the market is continuing in the
original direction, because you can expect a deeper pullback on a high time frame. Keep in mind that you can and
should use retracements to define your trading rules, but you should not use them without other tools as well.
Extensions
Extensions are movements in the opposite direction of the trend in the time frame you are analyzing that recapture
anything over 100% of the previous move. This is similar to a retracement, but it is beyond 100%, whereas
retracements stop when the trend reaches its beginning value. The most important ratios with extensions are 127.2%,
161.8% and 261.8%. Extensions can be used with confluence areas to add weight to turns in the market.
50%
Projections On the surface, projections seem quite simple. They compare trend swings to trend swings and counter trend swings to counter trend swings. However, they become complex because of the vast number of patterns and the names for the various patterns. For example, you can find extensions in many places of an Elliot wave pattern, Gartley patterns, ABCD patterns and many more. To begin understanding projections, you need to know the important ratios, which are: 61.8%, 100% and 127.2%. Projections allow traders to project what may happen in the market based on the existing plan. By watching for those important ratios, you can define a set of rules and a basic money management plan to apply to your trading decisions to further your chances of success. However, as with extensions, projections should not be used solely as a basis for decisions. Confluence Areas When you take multiple fib techniques, such as projections, extensions and retracements, and combine them, you will discover confluence areas. Confluence areas are areas where multiple Fibonacci areas come together. These are excellent points from which to make decisions, because multiple traders are noticing the same level, which increases its likelihood of happening. Trading Fibonacci patterns can be very rewarding for a trader; however, this alone will not make you successful and is in fact only a small part of the equation to trading successful. Trading is a developed skill that can take years to master and understand that all the techniques and entries in the world are useless unless the trader understands him or herself an d their own personal weaknesses and strengths. If you are serious about trading, find a good mentor and trade in simulation mode until you and your mentor discuss going live. Come in and see JAM and his team at www.strategicdaytrading.com and spend a week in his room and see real traders live in action!
127.2%
50%
Extension
A
B
C
D
Measure from A to B and look for leg C to D to complete 61.8, 100 or 127.2% of that leg for your projection.
Live Trading room
trade for more than a recreational activity. Even with an easy to use trading platform like the one offered by
NinjaTrader, you must be able to understand some basic mathematical principles and ratios to make the right
decisions.
Fibonacci and Trading
The Fibonacci summation series is one of these, and may, in fact, be the most important. This pattern, which is found
over and over again in nature, actually can be applied to the trading platform as well.
Fibonacci discovered a summation series where, starting with 1 and 1 and adding the sum to the previous number,
you can arrive at a nearly constant ratio. His series, which is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233 and so forth,
is seen throughout the natural world in the design patterns of plants and animals. Using this summation series, you
can arrive at an important ratio. If you divide one number by the previous one, such as 55/34, you would get an
answer that is close to the irrational number of 1.61803398875. This, which when rounded to 1.618, is known as phi,
and is also called the “Golden Mean.” Used in architecture regularly, this is considered by some to be the perfect
ratio.
Now, the Golden Mean is quite fascinating, and you could spend hours studying it and its many implications, but how
does it apply to trading? This Fibonacci ratio can be found in many different tools used in trading. Understanding and
using a variety of these tools will help you succeed.
Retracements
Retracements are movements in the opposite direction of the trend in the time frame you are analyzing. For example,
if the market is moving in an upwards direction, then reaches a peak, pivots and begins to fall back towards where it
began increasing, you are watching a retracement.
38,2%
61.8%
Of all of the Fibonacci tools traders can use, this one holds the most weight. The ratios involved in this analysis are
38.2%, 50%, 61.8% and 78.6%, with 50% and 61.8% being the medium time frame and entry time frame traders
most commonly use. In a higher time frame chart, traders may turn on a 38.2% when the market is continuing in the
original direction, because you can expect a deeper pullback on a high time frame. Keep in mind that you can and
should use retracements to define your trading rules, but you should not use them without other tools as well.
Extensions
Extensions are movements in the opposite direction of the trend in the time frame you are analyzing that recapture
anything over 100% of the previous move. This is similar to a retracement, but it is beyond 100%, whereas
retracements stop when the trend reaches its beginning value. The most important ratios with extensions are 127.2%,
161.8% and 261.8%. Extensions can be used with confluence areas to add weight to turns in the market.
50%
Projections On the surface, projections seem quite simple. They compare trend swings to trend swings and counter trend swings to counter trend swings. However, they become complex because of the vast number of patterns and the names for the various patterns. For example, you can find extensions in many places of an Elliot wave pattern, Gartley patterns, ABCD patterns and many more. To begin understanding projections, you need to know the important ratios, which are: 61.8%, 100% and 127.2%. Projections allow traders to project what may happen in the market based on the existing plan. By watching for those important ratios, you can define a set of rules and a basic money management plan to apply to your trading decisions to further your chances of success. However, as with extensions, projections should not be used solely as a basis for decisions. Confluence Areas When you take multiple fib techniques, such as projections, extensions and retracements, and combine them, you will discover confluence areas. Confluence areas are areas where multiple Fibonacci areas come together. These are excellent points from which to make decisions, because multiple traders are noticing the same level, which increases its likelihood of happening. Trading Fibonacci patterns can be very rewarding for a trader; however, this alone will not make you successful and is in fact only a small part of the equation to trading successful. Trading is a developed skill that can take years to master and understand that all the techniques and entries in the world are useless unless the trader understands him or herself an d their own personal weaknesses and strengths. If you are serious about trading, find a good mentor and trade in simulation mode until you and your mentor discuss going live. Come in and see JAM and his team at www.strategicdaytrading.com and spend a week in his room and see real traders live in action!
127.2%
50%
Extension
A
B
C
D
Measure from A to B and look for leg C to D to complete 61.8, 100 or 127.2% of that leg for your projection.
Live Trading room
